Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System

Summary

A news-breaking account of the global stock market's subterranean battles, Dark Pools portrays the rise of the "bots"- artificially intelligent systems that execute trades in milliseconds and use the cover of darkness to out-maneuver the humans who've created them.

In the beginning was Josh Levine, an idealistic programming genius who dreamed of wresting control of the market from the big exchanges that, again and again, gave the giant institutions an advantage over the little guy. Levine created a computerized trading hub named Island where small traders swapped stocks, and over time his invention morphed into a global electronic stock market that sent trillions in capital through a vast jungle of fiber-optic cables.

By then, the market that Levine had sought to fix had turned upside down, birthing secretive exchanges called dark pools and a new species of trading machines that could think, and that seemed, ominously, to be slipping the control of their human masters.

Dark Pools is the fascinating story of how global markets have been hijacked by trading robots--many so self-directed that humans can't predict what they'll do next.

Better than Lewis' book on Flash Trading, this book traces how the hft industry came to be and how much (or how little) they make. The usual suspects include the brokers and a few giant hedge funds, but most of the fault goes to the greedy exchanges, who let these traders colocate with them.

This is a remarkable story and one of my favorite books of the year. It details how computers came to replace people in financial trading, giving rise to entirely new forms based on algorithms, high-speed trading and artificial intelligence. It's one of the most important stories of the modern era. The book reads like Michael Lewis' The Big Short, hard to put down but dense with industry information and personal stories.The protagonist is a reclusive slacker programmer named Josh Levine (josh.com) who almost single-handed forced the industry to change with his software (Island ECN) to allow computers to trade between one another without human middle-men taking a cut. This would seem logical but the entrenched exchanges (NYSE, NASDAQ) had little interest or incentive since their flesh and blood market-maker middle-men were making so much money the old fashioned way. Levine and company eventually became so successful the big boards had no choice but to follow or die, eventually buying them out and adopting Levine's system. Incredibly he wrote most of it in C on MS-DOS using commodity PC hardware. There's much more to the story, it will appeal to anyone who trades stocks or knows something about computer networks ("the plumbing"). The book leaves open the specter of another "flash crash" like what happened in 2010 when the algos (computer trading algorithms) went haywire. The book is strongest as a history of how computers replaced humans, it's a wild and fascinating trip that is still ongoing. Artificial Intelligence is now getting good at long term trading (the next frontier after micro-second HST) - just hand the money to the computer and it does the rest, an artificial Warren Buffet to replace money managers.

I liked this book way more than I thought I would. Previously my opinion was that this topic was somewhat dry and boring, but the author is similar to Michael Lewis in that he weaves a compelling story around a subject that is somewhat complex and not familiar to a lot of people. Good read if you are interested in finance or the stock market.